The Federal Reserve’s core inflation rate fell below 2%; The S&P 500 rose

The Federal Reserve’s core inflation rate, the core PCE price index, showed that core price pressures continued to cool more than expected in November. Core inflation has been running at an annualized rate of 1.9% over the past six months, trade department data showed. S&P 500 futures rose.




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Inflation falling to the central bank’s 2% target on an annual basis, unemployment below 4% and economic growth firming help explain why policymakers are beginning to worry less about an inflationary rebound.

November PCE inflation rate

The personal consumption expenditures, or PCE, price index fell 0.1% in November, matching forecasts. The annual headline inflation rate fell to 2.6%, below estimates of 2.9% that came before downward revisions to earlier inflation data.

In general, the Federal Reserve’s decision-making puts more weight on core inflation, which removes volatile food and energy prices. The core PCE price index rose 0.1% in November – an actual 0.06% unrounded – cooler than forecasts of 0.2%.

Core 12-month inflation fell to 3.2%, below Wall Street expectations of 3.4%.

Federal Reserve Chairman Jerome Powell said policymakers wanted to look at six months of inflation data to make sure the inflation trend was not accelerating. On a six-month basis, PCE inflation is running at a 2% annualized rate, while core PCE inflation remains below the Fed’s 2% inflation target.

Fed Rate Cut Odds Grow

After the November PCE report, market prices showed 86% odds The first rate cut will come at the March 20 meeting, which was 79% on Wednesday. Markets now see 48% odds on next year’s rate cuts of 1.75 percentage points, with revisions to earlier inflation data coming in at 38% in the latest estimate of Q3 GDP growth released on Thursday.

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While the Fed penciled in 75 basis points of rate cuts through 2024 in its latest projections, markets have priced in more than twice that and are getting closer to pricing in another quarter-point cut.

A rapid decline in inflation has increasingly constrained the federal funds rate from the current 5.25% to 5.5%.

The degree of monetary policy tightening by the central bank reflects the real federal funds rate, that is, how much its key interest rate exceeds the rate of inflation. In Q3, the real federal funds rate ranged from 3.25% to 3.5%. The central bank’s long-term estimate of the neutral policy rate compares to 0.5%, above its 2% inflation target. A neutral rate is one that neither restricts nor enhances growth.

Supercore inflation

Beginning in late 2022, Federal Reserve Chairman Powell shifted inflationary focus to core PCE services, excluding housing or supercore services. That was in line with the central bank’s view that a tight labor market and high wage growth were at the root of stubbornly high inflation. Wages make up a large percentage of costs for service businesses. So, as wage pressures moderate, super-core services inflation should moderate.

Prices for core non-housing services, including health care, hairdressing and hospitality, rose just 0.12% in November for the second month in a row. 12-month super core services inflation eased to 3.5% from 3.8% in October and 4.1% in September.

This should reinforce that inflationary trends are broad-based, giving assurance to the central bank that a snapback in price pressures is unlikely.

Personal income, expenditure

The PCE price index is released along with the monthly Personal Income and Expenditures report from the Department of Commerce. According to forecasts, personal income rose 0.4% in the month. Personal consumption expenditures rose 0.2% in November, shying from forecasts for a modest 0.3% rise.

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S&P 500, 10-year Treasury yield

The S&P 500 rose 0.4% after the inflation data in early Friday stock market action. The S&P 500 rose 1% on Thursday, rebounding after a 1.5% sell-off late Wednesday. That continued a 16% rally since Oct. 27, lifting the S&P 500 to within 1% of its Jan. 3, 2022 high.

The S&P 500 rally comes amid a sharp drop in the 10-year Treasury yield, which is important not only for mortgage rates and auto loans, but also for stock valuations. Analysts use the 10-year Treasury yield as a risk-free rate to discount the present value of future earnings. When 10-year yields fall, those future revenue streams for growth companies are more attractive.

On Friday, the 10-year Treasury yield fell three basis points to 3.86%.

Be sure to read IBD’s The Big Picture column after each trading day to get the latest information on the prevailing stock market trend and what it means for your trading decisions.

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